Deed in Lieu Vs. Foreclosure With HELOC in Arizona

Judicial Versus Non-Judicial Foreclosure in Arizona

Lenders may foreclose without going through the Arizona court system if a "power of sale" clause is included in the trust deed or mortgage lien. It doesn't matter if there is a HELOC on the home or not. The power of sale clause gives the lender the right to formally notify the homeowner that it intends to reclaim the home after a specified period of time due to homeowner default. If the lender does not have a power of sale clause, it must foreclose through the court system. Judicial foreclosure is slower and more expensive than the non-judicial remedy.

Lien Position

Even if a homeowner is delinquent on his HELOC, the lender may be reluctant to foreclose. HELOCs are second-position liens, which means that other liens must be paid first. First mortgages and property taxes have greater payout priority than HELOCs. As a result, if the fair-market value of the home is less than the outstanding balance of the first mortgage -- plus any past-due property taxes -- then the HELOC debt would be eliminated in foreclosure. Nevertheless, the lender may opt to secure a judgment against the homeowner for the HELOC balance.

Deed-in-Lieu of Foreclosure in Arizona

In the past, deed-in-lieu of foreclosure allowed homeowners to return the title of the property to the lender without having to go through foreclosure. It was faster and cheaper for lenders; borrowers found that their credit was damaged less than in a foreclosure proceeding and deficiencies were waived. Nationwide, including in Arizona, lenders began to shun this choice because of the "merger of title" risk. Merger of title results in junior liens having a greater payout priority than before and a dissolution of the lender's secured interest. While these deals are making a resurgence, an Arizona borrower will probably find that having a HELOC will make a deed-in-lieu impossible.

HELOCs and Deed-in-Lieu of Foreclosure

Whether or not a homeowner who has a HELOC is eligible to transfer title to the lender to avoid foreclosure depends largely on the lender. However, most lenders will not permit a home with a second mortgage to complete a "DIL." This is because there isn't a practicable way for two lenders to share one property's title. In addition, if the home that's at risk of foreclosure has a value that exceeds the outstanding mortgage balances, the homeowner should strongly consider selling the home to satisfy the liens.